DECISION ANALYSIS-ICE BREAKER

Find the maximax possible payoff of Kelly Construction.

• 400,000

• 800,000

• 1,200,000

• 100,000

In which daily supply of salad has the highest minimum payoff (maximin)?

• 40 salads

• 50 salads

• 60 salads

• 70 salads

Answer explanation

• If we decide to supply 40 salads, the minimum pay-off is $80.

• If we decide to supply 50 salads, the minimum pay-off is $0.

• If we decide to supply 60 salads, the minimum pay-off is ($80).

• If we decide to supply 70 salads, the minimum pay-off is ($160).

The highest minimum payoff arises from supplying 40 salads. This ensures that the worst possible scenario still results in a gain of at least $80.

Using the minimax regret criterion, how many salad supplies would the management desire to reduce maximum regret?

• 40 salads

• 50 salads

• 60 salads

• 70 salads

Answer explanation

• If we decide to supply 40 salads, the maximum regret is $60.

• If we decide to supply 50 salads, the maximum regret is $80.

• If we decide to supply 60 salads, the maximum regret is $160.

• If we decide to supply 70 salads, the maximum regret is $240.

A manager employing the minimax regret criterion would want to minimize that maximum regret, and therefore supply 40 salads only.

*Note that the given example does not have probabilities.

It is the price that one would be willing to pay to gain access to perfect information.

It is a statistical calculation used primarily in the business field to help determine optimal courses of action.